Carbon price rises ahead of Copenhagen

Energy firms predict further increases in carbon price are imminent if phase three allowances are not auctioned earlier

The price of EU carbon emissions futures rose nearly three per cent to a three-week high of €13.96 (£12.69) yesterday as banks stepped up purchasing activity ahead of the Copenhagen climate change summit next week.

The price of UN-approved Certified Emissions Reduction (CER) offset credits also rose 2.77 per cent to €12.97 a tonne.

The banks involved appear to be taking a punt on a deal being reached in Copenhagen, a scenario that is expected to drive up the price of carbon allowances.

The increase in prices was also partly attributed to the European Commission's decision to formally appeal a September court decision which ruled that it did not have the authority to revise emission caps for Poland and Estonia downwards.

The price of carbon in the EU emissions trading scheme (ETS) slipped more than 2.5 per cent in the day following the ruling over fears the market could be flooded with extra allowances. The market was subsequently calmed after it emerged that any revised cap would actually be tighter because the two countries would be forced to use more recent data.

In related news, EU officials are this week setting the rules for the third phase of the ETS, which will begin in 2013.

It is the first time that power companies - which are covered by about 60 per cent of permits in the system - will need to buy permits to emit rather than being given them for nothing. The auctions were originally due to start in 2011 but reports have emerged suggesting the Commission might now wait until 2013.

Power firms are concerned that this delay will lead to a liquidity crisis in the market, because they buy allowances alongside the commissioning of future generation.

By the end of 2012, electricity companies will need to have acquired about 1.2 billion to 1.4 billion emission allowances to cover the CO2 of their forward electricity contracts beyond 2013.

This would mean that permits for generating electricity after 2013 would have to be purchased from phase two of the scheme, just as it is coming to an end.

Industry body Eurelectric wrote to the European Commission this week, warning that the need to purchase allowances in phase two could mean demand for EUAs will exceed supply by about 450million to 650 million by the end of 2012.

This could lead to a carbon price as high as €65 and would "significantly increase the risk of serious disruption of the EU carbon market and also the electricity market in the lead-in to ETS phase three," the group said in a letter to the Commission.

Such a high price would have an effect on European electricity bills, the letter added. "According to our calculations, there is the prospect under the most severe outcome that European electricity customers could face additional costs of up to €50bn by 2012," it said.

However, it remains to be seen how successful the letter will prove, given a number of European energy firms have said in recent weeks that the carbon price is currently too low to drive the investments in nuclear, carbon capture and storage and renewable energy technologies that the EU is trying to encourage.

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